2 Frédéric Bastiat“Everyone wants to live at the expense of the state. They forget that the state lives at the expense of everyone.”"In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause - it is seen. The others unfold in succession - they are not seen: it is well for us, if they are foreseen.Between a good and a bad economist this constitutes the whole difference: the one takes account only of the visible effect; the other takes account of both the effects which are seen and those which it is necessary to foresee.Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse.Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, at the risk of a small present evil"

4 Conventional wisdomgovernments are there to intervene to stabilize the economygovernments are there to implement political prioritiesgovernments are there to promote economic growthgovernments are there to correct market failures

5 AssumptionsAs opposed to laissez-faire, economic policy is by definition about interventionismThere is a great number of variants of the scope of intervention …… resulting in a more or less defensive or proactive approach to exercising the policies (intervention power)

9 Examples for consideration 1Scrappage schemes:Purpose: increase demand for new cars: provide growth incentive to car industryAssumption: segment of economy with lots of multiplication effects, large employer, get consumers go against the investment cycle (induced by crisis)Description of scheme: subsidy from state budget paid on new car purchasesWho benefited: not only domestic, but also foreign car producersWho suffered the costs: all taxpayersSide effects: distortion to competitive environment, market signalsQuestion for discussion: was that a useful scheme? Discuss the immediate effects, compared to systemic implications (costs).

10 Examples for consideration 2Investment incentives:Purpose: promote investment, mostly (but not only) FDI, create jobs, instrument of „industrial“ policy (may also be calibrated regionally, sectorally …)Assumption: important to actively promote competitivity of economy, use a lot by all countriesDescription of scheme: various incentives provided to investor over a certain financial limit (tax holidays, subsidy to jobs created, providing all necessary infrastructure such as road, railway connection, water and electricity lines etc)Who benefits: all investors eligible by financial criterionWho suffers the costs: all taxpayers, non-eligible companies who are at clear market disadvantage, incidentally mostly domestic.Side effects: to some extent it is a scheme killer of small domestic enterprises, in addition it distorts the structural balance in economies (Slovakia and Czechs excessively dependent on highly cyclical car industry)Question for discussion: is that a useful scheme? Discuss the immediate effects, compared to systemic implications (costs).

11 Examples for consideration 3Fiscal stimuliPurpose: compensate for output losses in crisis timeAssumption: governments should actively play the anticyclical card of fiscal policiesDescription of scheme: implemented either through automatic fiscal stabilizers (what is that?) or discretionary fiscal policies, most often both, in many ways quite similar to the previous two (actually both could be seen as part of it)Who benefits: may have short-term cascade effects on many segments of economyWho suffers the costs: all taxpayers (current – via deficit - and future – via debt), private sector (crowding-out and cost effect of public deficit/debt on private investment)Side effects: over time loss of credibility of fiscal policy, implied increased cost of borrowing and, most of all, future pro-cyclical feature of fiscal policy = fiscal consolidation in times of stagnation/recession (as seen currently)Question for discussion: is that a viable policy instrument? Discuss the short-term effects as opposed to the medium and long term ones ….

12 Examples for consideration 4School fees for university educationPurpose: decrease the cost of university education to the state budget, other (but disputed) arguments: provide incentives to school and studentsAssumption (as officially stated): create a new financing stream to cover the needs and to improve the quality of education, create increased cost pressure on this segment of the educational system with the aim of increasing the quality, distribute more evenly the costs of getting university grades (“those who directly benefit should pay more”) – currently presumably distributed very unfairlyDescription of scheme: fees paid by students to cover a certain part (not all) of the costs of the education, technically various options exist …Who benefits: in the short run immediately taxpayers, in the longer run (perhaps) the entire society and economy (= benefits of better skilled population)Who suffers the costs: studentsSide effects: if not designed properly, may lead to various discriminatory distortions in access to educationQuestion: what is your view of that? Do you find it fair to introduce school fees or do you stick to the assumption that education should be kept “free” (knowing however that “ there ain´t no such thing as a free lunch”

13 Examples for consideration 5Deposit insurance schemesPurpose: protect the savings of depositors (currently up to 100 k euros equivalent) in case of bankruptcy of financial institutionsAssumption: costs of bankruptcy should be primarily covered by shareholders, depositors should get better treatment because of information asymmetryDescription of scheme: covers most of the deposit instruments as offered by banks and other financial institutionsWho benefits: depositorsWho suffers the costs: all depositors of all institutions (contribution of institutions to the Deposit Insurance Fund, calculated as proportion of the deposits they administer): cost transferred to the depositors themselves via increased feesSide effects: moral hazard: depositors less vigilant to the institutional risk, the chose their institution solely by conditions on deposits it offers, also counterproductive on the institution´s side (aggressive market practices in search of new deposit client, in limit approaching the prudential principles)Question: what is your view of that? Is it correct that institutions (governments or Deposit Insurance Schemes) take away from customers/consumers (individuals) an ever increasing share of market risk? Why should consumers not be allowed to assume their part of risk?

14 Other examples for considerationForex interventions by the central bank: when are they justified?Should monetary policies consider asset price development and how?How much (if at all) fiscal policy power should be taken away from governments in case of fiscal trouble?Is a higher economic growth (higher GDP increase) a viable option to eliminate the accumulated fiscal debt?How can a government support economic growth in a situation when the fiscal instrument is no more available (as it was so far)?And, actually, should governments exercise growth policies at all? If not, what functions for governments do we see in the future?When is a deficit of public budgets excessive, what are the criteria to evaluate it? Actually, is a deficit of public budgets an acceptable notion at all?What needs to be done further to the pension systems (beyond what has been introduced already) to make them sustainable in the long run?Optimal mix of fiscal reform elements (expenditure vs revenue)Is a fiscal union a solution to the Eurozone trouble?Is an early membership in the Eurozone still an option for us, given the structural weaknesses of our economy? Are there still benefits to be in? How do they compare to the benefits of remaining out?Co-ordination of fiscal policies was embodied in the SGP – why has it failed? And is the current fiscal pact sufficient to keep deficits and debts under control

22 Hopes and reality„Spain is not Greece“ Elena Salgado, Spanish minister of finance 2/2010„Portugal is not Greece“ The Economist 4/2010„Greece is not Ireland“ George Papaconstantinos, Greek minister of finance, 11/2010„Ireland is not Greece„ Brian Lenihan, Irish minister of finance, 11/2010“Ireland is not Spain or Portugal” - Angel Gurria, general secretary OECD, 11/2010“Spain is not Ireland or Portugal” - Elena Salgado, Spanish minister of finance, 11/2010„Italy is not Spain” - Ed Parker, Fitch, 6/2012“Spain is not Uganda” – Mariano Rajoy, Spanish prime minister, 6/2012“Uganda does not intend to be like Spain” - Sam Kutesa, Ugandian minister of foreign affairs, 6/2012

23 The past and the future …The Glass-Steagall Act from1933 consisted of 37 pages and has supported the financial stability of the US economy for over 70 years …The Dodd-Frank Act from 2010 consists of 848 pages, together with the related implementation regulation it represents several hundreds of documents with over pages …

24 Few questions we are dealing with … these are not minor issues, indeedIs the eurozone capable of surviving?If yes, at what cost – and how will these costs distributed?What needs to be done (changed) for the euro to survive (institutions, policies …)?Are the decisions, taken recently, sufficient?Short term vs long term effects of decisions …Do we really need to be scared of the consequences if the euro collapses?If it does, how would that impact to global financial system, economies …If the eurozone remains heterogeneous (and it certainly does), who are the losers and who are the winners (and why is that, how did it occur?)

25 Just a few questions we are dealing with … ctdAre politicians ready to embark on genuine changes?Most importantly, are voters ready to support genuine changes? …… meaning: are voters willing (yet) to subscribe to the principle of cross-boarder redistribution and solidarity ( far beyond the current state of play…)Are we all ready for a fiscal union?Is an EU economic government THE solution .. If yes, are we talking about a technocratic OR democratic governmental platform? Question: what is the difference between the two?

26 Just a few questions we are dealing with … ctdIs the welfare state (EU – redistributive - social model) able to survive? In what form and with what content? Just have a look around the globe and try to compare …Actually, let's not be shy to ask even broader questions: is this not the sun set of market economies and is the future not linked to state interventionism? Are we ready to go, once again, the same road leading to the abyss? And why is it that some politicians (ironically some of them the most powerful in EU) are pushing towards the same mistakes, committed already by others in the past??And, without willing to be provocative, what will now happen in/to France? If Hollande suggests (as he already did), that he wants a) the Eurobonds and b) to give priority to fiscal growth stimuli, what consequences may this lead to?

27 Just a few questions we are dealing with … ctdActually, is it not that the fiscal union has started to emerge de facto (through transfers of debt (provide example), interstate lending, fiscal rescue packages to banks etc …?And, by the way, when we talk about fiscal union in the eurozone (EU), what precisely do we have in mind? Is it having harmonised taxes, or a centralised (federal) budget with its own revenue and expenditure (on what?) .. What is actually needed in the fiscal field for the fiscal policy to be able to support the monetary union?And is it not, that by adopting an extensive scheme of redistribution, a harmonised welfare state across EU, actually new divergences will emerge (or the present ones will become more visible), implying even more transfers (redistribution)?

28 And finally, a few questions (all implied by the crisis) about ourselves and the euro (EU) …Do we still see benefits of joining (which ones)?How valid is the argument that, actually, the eurozone is (and has always been) a kind of moving target?If it moves where it is supposed (and expected) to move, why should we care (or care more than before)?Can we ignore how open our economy is and how integrated it is with the EU, eurozone and Germany most specifically?Do we have the capacity to assess our own situation objectively?

29 And, broadly considering …Are politicians (governments) ready to make the move towards fiscal (and political) union (= mutualising the costs)And, even more importantly, are voters (taxpayers) ready to make that step??